Why doesn't the Postal Service make money?

The U.S. Postal Service announced this week that it would end Saturday letter delivery beginning in August. The change reportedly will save the USPS $2 billion annually. UPS and FedEx post profits fairly regularly. Why can't the Postal Service make money delivering mail?

Because it got complacent holding a monopoly. The U.S. Postal Service has a legal monopoly on the non-urgent delivery of letters. It used to be an extremely valuable asset. The monopoly was so valuable, in fact, that the agency built its future around the lucrative first-class letter business. With the profits from first-class mail, the Postal Service priced the delivery of newspapers and magazines at well below cost. In 2006 alone, the USPS subsidized periodicals to the tune of $273 million. The profits from first-class letter monopoly also allowed the Postal Service to stand by while private companies dominated the now crucial parcel-delivery business. The Internet eventually made letters obsolete; gas prices surged; and health care and retirement costs rose beyond projections, turning letter delivery from a cash cow into a burden. (The true cost of delivering a letter is likely more than twice what we now pay.) The collapse of first-class mail was inevitably going to damage the agency. Many observers believe, however, that the Postal Service could have survived those challenges, and even prospered like other delivery companies, if it hadn't relied so heavily on the profits from its exclusive letter-delivery business.

The monopoly is a curse in another way: When the government grants a monopoly, it demands the right to regulate in return. The Postal Service has to petition the Postal Regulatory Commission, and sometimes Congress, whenever it wants to make a substantial change to its business model. Federal officials have opposed attempts to save money by closing remote post offices and cutting Saturday delivery in the past. The USPS also has the government looking over its shoulder in labor negotiations.

Most postal experts believe the USPS has to behave more like a private agency if it's to stop losing billions of dollars every year. Competitors, however, won't accept deregulation of the Postal Service as long as it holds its monopoly on first-class mail. (The USPS holds a second monopoly on access to mailboxes, which it would also have to give up.) As a private business with less federal oversight, the Postal Service could respond more nimbly to market demand. Consider package delivery, a business that the USPS is now aggressively pursuing. Private carriers charge substantially more to deliver parcels to rural locations. According to the UPS website, the lowest rate to deliver a four-pound package from New York City to White Owl, S.D., is $20.51. The Postal Service, which is under pressure from the federal government to provide affordable service to remote locations, charges just $12.07 to deliver the same box. A less-regulated Postal Service could also impose surge-pricing for periods like the holidays or could rearrange delivery schedules to satisfy periodic changes in demand.

Deregulation advocates point to European Union postal services, all of which are either private or about to become private. Germany privatized its mail service in 1995, and it has since combined with DHL to become the world's largest logistics company.